4 things to expect from Europe in 2016

French President Francois Hollande welcomes German Chancellor Angela Merkel prior to a meeting at the Elysee Palace on July 06, 2015 in Paris, France. Getty In addition to the continuation of current crises, Europe will face new matters of contention in 2016. Nationalism and fragmentation within the EU will keep growing, including on the Brexit issue.

When we look back at the major challenges that Europe has faced in 2015, it seems that a few of these have moved into the frozen category.

The Greek drama that took a central stage has now largely been resolved. The government led by Syriza and Prime Minister Alexis Tsipras have agreed to the new bailout in exchange for reforms they are gradually implementing. While Athens will keep trying to avoid the implementation of the entire reform package, bail-out reviews will remain tense and debt relief is unlikely in 2016. The government-coalition will probably remain in power, even amid social pressure due to a high unemployment rate and increasing poverty.

The Ukrainian conflict is now largely frozen and has reached the stage of trade-war between Russia and Western powers; as seen with Ukraine's recent free-trade agreement with the European Union. Eastern EU countries (under the Visegraad group and Poland's lead) will pressure the EU to keep the sanctions in place and to expand NATO's presence in the region. On the other end, Berlin will be interested in safeguarding its energy routes from Russia, and thus it is likely that the status quo will remain and the sanctions be maintained.

But the European continent will again be at the center of attentions in 2016. European leaders will keep battling over the refugee crisis management and try to find ways to boost economic recovery. The UK referendum on EU membership the continuing rise of nationalism, and the first year of anti-austerity governments in Portugal and Poland; as well as persistent terrorist threats will feed the rest of the European political risk agenda.

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1. The refugee crisis

A policeman tries to control migrants as ticket control rules now mandate each passenger to have allocated seats on trains bound for the West from Budapest, Hungary, on August 31, 2015.
Bernadett Szabo/Reuters

The gap between member states on the issue is set to grow in 2016. Eastern countries will defend their closed borders policy and Merkel could feel increasingly isolated, both among European leaders and within her own government coalition: regional elections in March could exacerbate divisions within her coalition.

With such deep internal cracks on a refugee allocation plan, Brussels will focus on making the external border police efficient, and will prioritize its partnership with Turkey in order to stop the flow of refugees from entering the Schengen area. Winter will also likely cause a decrease in the flow of refugees attempting to cross the Mediterranean, and thus will temper the pressure on leaders to reach a comprehensive agreement until spring.

But this crisis will prompt leaders to re-think the Schengen agreement and free-movement of people as border blocking by some member states continues. Reforming this cornerstone of the European Union is a vast field for political fragmentation that will also find echoes in the constant terror threat on the continent and the rise of far-right and anti-immigrant parties.

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2. Terror threat and security

Lennart Preiss/Getty Images

In fact, IS-backed terrorism took on a whole different level in 2015 and the pressure will probably only increase in 2016.

The international response will continue its balancing act between overcoming ISIS and promoting a democratic shift away from the Assad regime, with constant political opposition between the U.S-led coalition and Russian interests in the region.

Meanwhile, European leaders will work on ways to counter the threat at home through enhanced security policies, like France's constitutional reform. National politics will increasingly be defined by debates on immigration and the place of Muslims in European societies. The Islamist terror threat will doubtlessly feed the nationalist and anti-immigrant parties agenda, and put Schengen on the front line as nationalists consider that the open-border policy enables terrorists to commute freely within groups of refugees coming from Syria.

Events such as the European Football Championship - a competition that will see bring together football fans from 24 countries in France over the summer - will be under pressure. This could prompt leaders to take on emergency measures, with the state of emergency in France likely to be extended.

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3. National politics deepen European fragmentation

Partido Popular de Catalunya (Popular Party of Catalonia) members of Catalan parliament hold Spanish flags at the end of the parliamentary session on November 9, 2015 in Barcelona, Spain.
David Ramos/Getty Images

There won't be any major election in Europe in 2016 other than in Ireland where the government's strong economic record should ensure it victory. But the end of 2015 was rich in electoral results that will spread their lot of political risk in the first few months of this year.

The general election in Spain resulted in a divided parliament, with no major political force emerging. Coalition talks led by the incumbent PM Mariano Rajoy will at the very best result in an unstable coalition. But negotiations between parties with such disparate views are unlikely to be successful. Hence, a return to the polls in the spring is to be expected, and in the short-term such an electoral outcome creates confusion and instability.

The effect of an unstable coalition or of inconclusive coalition talks on voters will have to be watched closely on two fronts. First, a new election could give Podemos and Ciudadanos (the two newcomers in Spanish politics) a new boost of influence. Secondly, it could highlight the weakness of Spanish national politics as Catalonia hopes to start its independence process.

A potential surge of Podemos would echo recent elections in neighboring Portugal where the center-right incumbent coalition was overrun by the Socialists, who in turn struck an alliance with a leftist bloc deeply opposed to fiscal rigor.

With Poland added to the basket of anti-austerity governments that emerged from 2015, the movement can be considered to have received a second-breath. As a result, deepened fragmentation on economic policies - particularly fiscal policy - will feed the European agenda with tension in the coming year.

2016 will be a campaign year in major EU countries ahead of elections in 2017, including France and Germany. In France, the nationalist and anti-EU National Front has been on the upswing. The party's influence on the political debate will probably encourage establishment parties to court NF voters by adopting some of its proposals, including on immigration - for the center-right - and opposition to fiscal rigor - for the Socialists.

Germany will also be prepping for the 2017 general elections, and the influence of a growing nationalist sentiment will weigh on the government's agenda. As a result, fragmentation will also reach the German-French partnership - the EU's traditional leaders - as both countries develop diverging interests.

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4. UK referendum in 2016

One of the main nationalist pushes in 2015 was certainly David Cameron's re-election on his promise of a referendum on EU membership. The renegotiation process he initiated - with a letter detailing four demands - in November will be cause for worry for investors and political leaders.

It is unlikely that Cameron will campaign for a Brexit, although he will have to save face with the Euroskeptic Tories by playing hard-ball in upcoming negotiations with other European leaders. Talks will most likely result in a political deal avoiding as much as possible the controversial claims like the 4-year benefit curb on immigrants in the UK by working out softer ways to do it — like an emergency brake.

Negotiations between EU leaders (set to begin in February) will again be an opportunity to observe divisions, but in the end Cameron will probably compromise on this controversial issue while defending his deal as a victory for Britain. The referendum could then be held before the end of the year — Cameron hopes to hold it next summer — with the "in" side likely to win.

In the meantime investors will react anxiously to uncertainty. A Brexit would mean the UK being temporarily out of the Single Market and would revive Scotland's independence claim with a probable referendum organized without delay.